ACCT 611 midterm 1

1. Which of the following types of audit evidence is generally the most reliable one? A) A bank statement provided by client's accounting department B) A bank confirmation mailed directly to the CPA office C) Analytical procedures D) Inquiries of the client's CFO

A bank confirmation mailed directly to the CPA office

1. Which of the following should NOT normally be included in the engagement letter for an audit? A) A description of responsibilities of client personnel to provide assistance. B) Auditor's scope of service and responsibilities. C) A description of the limitations of an audit. D) A listing of the client's warehouses selected for inventory testing.

A listing of the client's warehouses selected for inventory testing.

1. An auditor most likely would apply analytical procedures in the planning stage to A) Identify probable internal control weaknesses over certain transaction cycles. B) Obtain audit evidence on one specific account. C) Identify unusual account balances/patterns and high risk-areas. D) Identify related party transactions.

A) Identify unusual account balances/patterns and high risk-areas.

1. When the auditors are performing a first-time internal control audit in accordance with the Sarbanes-Oxley Act and PCAOB standards, they should: A) Modify their report for any significant deficiencies identified. B) Use a "bottom-up" approach to identify controls to test. C) Test controls for all significant accounts. D) Perform a separate assessment of controls over operation.

A) Test controls for all significant accounts.

1. According to PCAOB audit standards, audit documentation must be retained for A) three years. B) five years. C) seven years. D) as long as possible until PCAOB allows a CPA firm to get rid of those files.

A) seven years.

1. Which of these organizations has the responsibility to penalize auditors if they violate ethics rules when they audit private companies? A) American Institute of Certified Public Accountants. B) Securities and Exchange Commission. C) Financial Accounting Standards Board. D) Public Company Accounting Oversight Board.

American Institute of Certified Public Accountants.

1. The AICPA over time has played an important role in standards setting. Which of the following standards are currently established by the AICPA? A) Accounting standards applicable to nonpublic companies. B) Auditing standards applicable to audits of nonpublic companies. C) Quality control standards applicable to audits of public companies. D) Standards for reviews of the interim financial information issued by public companies.

Auditing standards applicable to audits of nonpublic companies.

1. Which of the following best describes why an independent auditor is asked to express an opinion on the fair presentation of financial statements? A) It is difficult to prepare financial statements that fairly present a firm's position and performance without the expertise of an independent auditor. B) It is management's responsibility to seek available independent aid in the appraisal of financial information in the financial statements. C) The opinion of an independent party is needed because a company may not be objective with respect to its own financial statements. D) It is a customary practice that all stockholders of a firm receive an independent report on whether the management team has worked hard to maximize the total firm value.

C) The opinion of an independent party is needed because a company may not be objective with respect to its own financial statements.

1. In a financial statement audit, the auditor obtains a reasonable level of assurance about whether the financial statements are free from material misstatements in order to express his final opinion. In order to obtain reasonable assurance, the auditor must A) have prior experience in the industry in which the audit client operates. B) examine all documents available at client's office. C) obtain sufficient audit evidence. D) test all controls around significant transaction cycles.

C) obtain sufficient audit evidence

1. Which of the following is considered an assurance engagement? A) Bookkeeping B) Preparation C) Compilation D) Audit

D) Audit

1. The risk that the auditors will conclude, based on substantive procedures, that a material misstatement does not exist in an account balance when, in fact, such a misstatement does exist is referred to as A) Business risk. B) Engagement risk. C) Control risk. D) Detection risk

Detection risk

1. An audit should be designed to achieve reasonable assurance of detecting material misstatements due to: A) Errors. B) Errors and fraud. C) Errors, fraud, and those illegal acts with a direct effect on financial statement amounts. D) Errors, fraud and illegal acts.

Errors, fraud, and those illegal acts with a direct effect on financial statement amounts.

1. Which of the following is correct concerning requirements about auditor communications about fraud? A) Fraud that involves senior management should be reported directly to the audit committee regardless of the amount involved. B) All fraud with a material effect on the financial statements should be reported directly by the auditor to the Securities and Exchange Commission. C) Fraud with a material effect on the financial statements should ordinarily be disclosed by the auditor through use of an "emphasis of a matter" paragraph added to the audit report. D) The auditor has no responsibility to disclose fraud outside the entity under any circumstances.

Fraud that involves senior management should be reported directly to the audit committee regardless of the amount involved.

1. A primary objective of procedures performed to obtain an understanding of internal control is to provide the auditors with: A) Knowledge necessary to determine the nature, timing, and extent of further audit procedures. B) Audit evidence to use in reducing detection risk. C) A basis for modifying tests of controls. D) An evaluation of the consistency of application of management policies.

Knowledge necessary to determine the nature, timing, and extent of further audit procedures.

1. In determining whether transactions have been recorded (or the completeness assertion), the direction of the audit testing should be from the: A) General ledger balances. B) Adjusted trial balance. C) Original source documents. D) General journal entries.

Original source documents.

1. An auditor concludes that a client's illegal act, which has a material effect on the financial statements, has not been properly accounted for or disclosed. Depending on the pervasiveness of the effect on the financial statements, the auditor should express either a(an): A) Adverse opinion or a disclaimer of opinion. B) Qualified opinion or an adverse opinion. C) Disclaimer of opinion or an unmodified (also called unqualified) opinion with an emphasis-of-matter paragraph. D) Unmodified (also called unqualified) opinion with an other-matter paragraph or a qualified opinion.

Qualified opinion or an adverse opinion.

1. Three conditions generally are present when fraud occurs. Select the one below that is NOT one of those conditions. A) Incentive or pressure. B) Opportunity. C) Supervisory position. D) Attitude

Supervisory position.

1. The 11 AICPA Auditing Principles requires that: A) The auditors shall have appropriate competence and capabilities. B) The audit be conducted in conformity with generally accepted accounting principles. C) Assistants shall all graduate from AICPA-approved accounting programs. D) The auditors shall express an opinion at the end of audit and correct client's accounting misstatements.

The auditors shall have appropriate competence and capabilities.

1. An entity's internal control system can malfunction due to the following reasons. One of the four options is NOT one of those reasons. It is A) Management overrides. B) Segregation of duties does not work at one high-end department store, since employees from different departments collide to steal expensive handbags. C) One employee in the warehouse department misunderstands the internal control manuals. D) There are many well-trained internal auditors at L'Oreal, who travel around the world to review internal controls at its subsidiaries in more than 100 countries.

There are many well-trained internal auditors at L'Oreal, who travel around the world to review internal controls at its subsidiaries in more than 100 countries.

1. Which of the following is NOT a primary purpose of audit documentation? A) To coordinate the audit to ensure compliance with audit standards. B) To support the final audit conclusion C) To support management's financial statements D) To provide evidence of the audit work performed.

To support management's financial statements

1. Some account balances, such as those for pensions and leases, are the result of complex calculations. The susceptibility to material misstatements in these types of accounts is defined as: A) audit risk. B) detection risk. C) inherent risk. D) sampling risk.

inherent risk.

1. Accounts receivable are recorded at the lower of cost or market value on the balance sheet. To perform annual A/R audit, an auditor reviews aged accounts receivable to assess likelihood of collection to support which assertion about A/R account? A) existence B) rights C) cutoff D) valuation

valuation